What is the ERC20 Ethereum Token Standard?

Cryptocurrency enthusiasts are well aware of how a lot of tokens are issued on the Ethereum blockchain. It also appears a lot of tokens are being issued which adhere to the new ERC20 token standard. A lot of people remain unaware of what ERC20 is all about and how it makes a difference compared to issuing tokens before this new standard was introduced. Let’s take a look at what makes ERC20 so special.

An Overview of the ERC20 Token Standard

No one needs an introduction as to what tokens are, but we will recap it briefly regardless. A token is designed to represent something else, in most cases, something of value. These tokens are – in the Ethereum ecosystem – issued on the blockchain, where they represent a financial value or exist as a digital asset. However, these tokens do not necessarily adhere to a particular standard.

That is about to change, thanks to the ERC20 token standard introduction. Although this will change very little for tokens on the surface, it is an interesting development. Tokens are still issued on the Ethereum network, and can be exchanged against other currencies. However, the ERC20 standard makes the assets more easily interchangeable and ensure they can work with Dapps adhering to the same standard.

As one would expect, the “magic” provided by ERC20 can be found under the hood. The ERC20 standard makes it easier for all compatible tokens to be natively supported by new projects and services. Moreover, the introduction of this standard allows for the tokenization of other features, including voting rights. Most native project tokens offer investors a vote on how the future of said project should look like.

Over the past few months, we have seen a multitude of ERC20 tokens being issued on the Ethereum blockchain. All of these digital assets are cross-compatible with different Dapps and projects. However, there is still some work to be done, as sending them to a token contract directly results in a financial loss. That is quite disturbing, yet it is also something developers can fix rather easily. For now, the workaround exists in the form of calling a function on the token’s contract rather than sending them directly from a controlled wallet.

Interestingly enough, token holders are still in full control of their assets at all times. The token contract adhering to the ERC20 standard can keep track of who owns how many tokens at any given time. Since every token is a sub-currency of the Ethereum network, that solution is easy to implement. All allocations of tokens are done through the token contract in question, while the owner still has to “command” the transfer himself.

In the end, a tokenized standard will prove to be quite beneficial to the Ethereum ecosystem as a whole. Ensuring these assets can be used across different platforms and projects will make them more useful. Otherwise, tokens would be locked within their own particular app ecosystem, which is not necessarily a good thing. The ERC20 standard is an intriguing development, although it is not a perfect solution either.

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About The Author

JP Buntinx is a FinTech and Bitcoin enthusiast living in Belgium. His passion for finance and technology made him one of the world's leading freelance Bitcoin writers, and he aims to achieve the same level of respect in the FinTech sector.